Securing a pay rise: a menu of options for tackling low pay and boosting productivity

How can we tackle low pay and boost productivity? How do we ensure that the wages of all workers see the benefit of the economic recovery? This article by Conor D'Arcy of the Resolution Foundation considers the major themes, such as the productivity puzzle and minimum wage, of their recently published collection of essays 'Securing a pay rise'.

The UK’s long, painful wage squeeze has finally ended. Pacier pay rises – and historically low inflation – are bringing welcome relief for workers. But as attention turns to making up the ground lost since the crisis – average earnings are still no higher in real terms than they were over a decade ago – how do we ensure that the wages of all workers, including those at the bottom and middle of the earnings ladder, see the benefit of the recovery? That’s the challenge taken on in Securing a pay rise, a collection of essays recently published by the Resolution Foundation. Its authors, hailing from academia, policy and journalism, assess the barriers to and potential for shared wage growth. Their thinking concentrates on four major themes.

Productivity

The ‘productivity puzzle’has been thoroughly debated but the scale of its fall – 17 per cent below where we would have expected it to be – is still staggering. Productivity growth is a prerequisite for wage growth in the long run; if we’re not producing more, we won’t get paid more. But in his essay, John Van Reenen laments the UK’s failure to put in place policies to encourage faster output growth. He sets out a range of policies, including national infrastructure plans the creation of challenger banks and spreading best practice in management, to tackle these shortcomings and develop a more long-term view.

Van Reenen’s critique of the UK’s short-term thinking is echoed by Andrew Smithers, who highlights the negative effect of linking executive bonuses to shifts in a company’s share price rather than underlying productivity gains. Alison Wolf offers a similarly far-sighted perspective on the labour market, and focuses on the potential of high-quality apprenticeships to improve the skills base of the workforce and facilitate careers with real upward momentum for non-graduates. Her call for a training levy, with employers paying a small percentage of their payroll towards the funding of apprenticeships, was heeded by the Chancellor at the Summer Budget, although the details have yet to be finalised.

Power and full employment

While productivity growth is essential, the evidence of the years immediately before the crisis suggests that, on its own, it will not be sufficient to ensure shared wage growth. Steve Machin and Alan Manning both track shifts in the labour market over recent decades. Machin focuses on how wage growth has become more sensitive to unemployment – increases in unemployment now seem to have a far bigger dampening effect on wage growth. Manning looks at the relative shift in power towards employers from workers. Both agree that getting more people into work will be crucial to ensure wage growth is shared.

A look across the Atlantic to the United States, as Jared Bernstein does in his essay, shows that these questions are not unique to the UK. Bernstein is particularly dismissive of the idea that improving skills across the workforce on its own will solve all our problems. Simon Wren-Lewis argues that, given the current macroeconomic reluctance to stoke demand through fiscal means, more must be done on the monetary side. He argues for a debate on unorthodox approaches – including the dropping of helicopter money – to maintain demand and protect wage growth in the next recession.

Different groups

In their chapter, Gavin Kelly and Matt Whittaker illustrate the hits which different groups have taken (see chart below). The clear outlier is the young. Paul Gregg’s essay shows how young people today have lost 15 years’ living standards gains, with the typical earnings of a young person entering the labour market during the recession only at the same real level as their counterparts born almost a generation earlier. He calls for a greater focus on making sure young people have the essentials in place – Level 2 English and Maths – as well as promoting progression opportunities within sectors.

Across sexes, ages and employment status, median wages fell between 2009 and 2014.

The uneven impact of the recession and wider policy is a theme Chris Giles develops. He remarks that “being born in the 1980s and 1990s was not advisable for your income or wealth”. For him, young people have lost out both due to bad timing but also through policy. He sets out a bold ten-point agenda to right those wrongs, including requiring the Student Loan Company to publish outcome data from higher education in order to allow prospective students to make an informed choice about their university and degree choice.

The chart also illustrates why the gender gap has closed recently for all the wrong reason; women’s pay has fallen slower than men’s. Susan Harkness’s essay highlights the broad range of inequalities still present and the growing role women’s earnings have for family incomes: half of all mothers are now the main breadwinner in couples in which the father is a low earner. She calls for more support with childcare to help low-earning women do full-time work as well as improving the quality of part-time roles.

The public sector workforce is the focus of John Hawksworth’s contribution, who argues that efficiency gains are possible across public sectors but that difficult decisions will be needed. This is all the more pressing with the Budget announcement that pay rises across the public sector will be capped at 1 per cent a year for the entirety of the Parliament. What this will mean for living standards as well as the quality of public services as departmental budgets are cuts will be a persistent challenge in this parliament.

Minimum wages

The final theme of the book coincides with arguably the most eye-catching policy in the Summer Budget: higher wage floors. Sir George Bain and I discuss the findings of an inquiry he chaired into the future of the minimum wage, which argued that a new settlement was needed to go beyond supporting the very lowest paid. We suggest that the government set an ambition of the minimum wage rising to 60 per cent of median pay but, crucially, maintaining the independence of the Low Pay Commission to advise on the appropriate rate. The Chancellor chose to take some of our advice – aiming for 60 per cent of the typical wage for over-25s by 2020 – but the role of the Low Pay Commission is still unclear. The evidence-based shepherding it has performed so well since the minimum wage’s introduction will be vital as the wage-floor pushes higher.

While a higher minimum wage will be of great value to many low earners, the debate raised by Arin Dube – higher wage-floors in cities – hasn’t gone away. The London Living Wage is currently £9.15 and would be expected to be significantly higher by 2020 when the National Living Wage should reach around £9. Those interested in the London mayoral race, both between parties and within parties, would do well to learn the lessons of Dube’s essay.

Ensuring that wage growth over the next five years will be shared is a serious challenge. Securing a pay rise’s authors do not share a common manifesto. But what they each agree on is the need to take this issue seriously. The Budget showed this government is concerned too but how this agenda is taken forward will be crucial. The essayists refuse to gloss over the difficulties but don’t fall into easy pessimism on the ability of policy to spread the gains of the recovery more evenly. Securing a pay rise has set out a menu for the government to choose from – what happens to wage growth over the next five years may well depend on whether its concerns and solutions are heeded.

What do you think will happen to wage growth over the next five years? Do you agree with the solutions put forward by the Resolution Foundation in this article? Share your thoughts using the comments section below.